Honorable.J...E%H
Btid~er
Gemmissiomer;~'~General
Land
Offtee:
:~
Austin,Texas .~Gppinioa..lvo;.J&r-~~~
lIei%'
-Whetheror io&'th~~xiimt
~ef.tranap~i& gas:obt
~Itaiae&from~.s~s leases
an@.be legall~.dedu+ed
from t$e St&e's reyalty
%tHxreatia.,the ape+xc
instamcos~sc..are
.eutJ&mdT
hhreid .
.. .
.
*:
Dear Mr. EuddLici
:
~e~~~~are~hhree..l~8i~~,invely~;~all~oi:ahich
thene.autl+oplQ
wererexecuted~uicle$ ef chapternl, Aqts.
42ad Leg;;-:1931
('Art;542lc,SocvlO,.V,e.~~)~..
The pertl-
aemt royaJt$proyZa&oraof.the.statute'-is
as rfo~~~wsr~
__ ..:~~!'!Eh&ar&sfaoluded:.i&em&ch+li.be
.. leased.;iom.a
.coasf~e~at~o:en;;,ill.~adqitiata
$0~.
the..das~.~e~t-.bld,tlie~for~::ot-.aot.Ieaa.
tha~rorieieigh~a~~~~~.:of.t~e~grosc
pro-'
dactiaa:ofotl, ec%he value of the &me,.-~
that may.-bk,pFqelaced
and saved*aad tietless
than.oae&gbth (l/8) of ,thegross pro&mtiea
‘-; y?c <~
.F
Hensr&e.J. Earl Rudder;page 2 (WW-1%)
of gas or the value.of%he same . . . that may
be prodaeedamd sold off the area. . . ."
The three leasesinvolved,reapectlvel~eonttinthe
followingcovenaatsin regWd to the royaltyto be paid the
Stater
'-
"1. Oae-eahth of the gross production
of gas,.orthe.valueof the s"e,. . .*
3l& .Aea royalty&I residuegas,.one-.
eQhth.of thenvalue of the'groea'produotien,
sold or aeed off the prezalees.The vtilueof
the'resLduegas te.be based upoh the highest.~
prlae-paid.8~ .offeredfor residuegas ia.the
genetil.are+'6r.,that'partwhich accruq to the
lees~p,.phl~ev.er~.is~thegreater." I :
-*3.1. any gas Sacludiug ~,' '.
'A8~-roytiity'oii
reabdae'.g~s;;-r~ld.or.arred
by thg lessee for
any,p~eeei'onCislxth.~..thevalue of suah
gas--4M:be;seld or.wed, but in ne event shall
the royalty-bebaq+d.upoaa price @f less..
thaa .the;hLghest'market~prioepaid erro$fered'
*. for-gasia the geaeral area cm that pqt qhloh
.acoruesto~.t+:prod~~er, whicheveris‘the
gzz,;-k ,i-ti,+~rovQJed,.hewever, lessee'
t befoM any:gaacoata%aingltclaLd/-.
hgd~oarbens,,.Zc$looverable$lpcomDierol;al~q~nti-
tlea~la'sold~ez+qd,.it wLl1 be PUB threugh 2.
'anadequateMl aadgas 8eparator.W the end
that all.-llqraid
hydrooarboaereaoverablef%?on-
the gas by:sa&.meansail1 be Ceoevered."'. :
.Byth+.pro$i&ae
tb+.pro$i&a~ of the th& lease;a& &I~ &mwi
abdve,.th~first.all~a'~~h~.:~~te.to take poesesaloaof -.
dtti'fraetioakl mrt'of the.&ae~zmoduoed~la kinQ 8~ to re-
oclvel?em the ieissee~~%hevii16the-of. 4%e seioadaad
third p%ovS.sS.owdo .-aot
prqvtdethat the:gtatemay%+
coiveifs rey&liqia Had, but providethat t&e less& :
@MA1 &ax the Stat&.the,.oaeb:valne. It ,mtast
be mmembexyd,
h*YZvCr,,that.tihelaagaageof the statatecoatels o'iierthe
tidnsef the.leasee,..aaiLtWt saoh leasea.eanne$.ther
.diplialsh
ner enlargethe'gtate'sroyalty'iatex-est ae,.eet
eat ip tk& &att$$e-; :' :
'-t'c"- I
HonorableJ. Earl kidder, page 4 (WwI&
leasesumber two aqd threeas set .outabove,which set&~out
how the value 6f malet: gas ls'to be determiiied;
follows
oloselythe method used @y the coartsin d;etenulning
such
value3 and do net cther@;e add anythingof slgnlflcance
ta
the 16ase oontraot.
There are w oaseswhich have ever held that a -
Limee must~oonstruot facllitleefor transportingor ‘proceaa-
lag gas withoutbeing petitted to chargesomethingbauk
againstthe lessbr. he lessee owes a duty te the~lessorto
use dlllgenoeIn marketingthe productof the.gaswell, but
no courthaa ever held that.theSta$e or any other lessar
ls entitledto a free ride to the marketingpoint. Mr. George
SlefklaIn Rights of Lealror and LesseeWith ResPect'teSale
of Gas and %e Gas Royalty~Prevlslcna,4th Annual IlistStute
on Oil and Gas~aad%xat~on, SouthwesternLegal Foundation.
In two simoe.rmlve
caseswhere the prLnolpa1Issue
was the method.tsbe used la determiningthe value-of r6Qalty
gas where the= was.110market at the wells, the:FLfthcf+
anlt held that.thepeeperreyaltyIn suoh,oasesflasone-
~lghth~of.the proce&ed.of,the&itual.sale,less a p&pep
3311& iwflniigco. 0. Ram111Dnilitig
at the well,..or$ttivalue after such gas had Wen proaesaed
'intoother.prodaots, the-aeu& held that the ro$altyewner;
was bound to a&oep%ypafmetit.eutsf the'valfleof the g&&at
the well au&was lnot&<led to have It xeflnedintO ~geme
other tmamdlty. It is believedthis case indIaate 't@t
the oourtsin th$s State tlould~fo&Xew the *well head.ii&l.tblng
pointarule ln'the federaleases hetiin~al*ed na%33s~%he
contra& oleaTljshoweda ocsmtrary Intent el..&heprt$esi
"Xii-tl&efore appoazs.,thaithe'State~mayl&ally
be clqsrged~~&sp&i zata'shar6Of t*uapertatloi costs~~f3om
the well head wh$ehts the pi$olugpoint fsr.valaeef
rOgalty'ga@, $o.that:polntwhere tptlq to the gaa passes
to bhe pnrohaa&r.'Thi~.&eai&&~& wheti the.valueof the
gloss produotlonof gas-lacomputedfrom a'prlckpa+d for
sucti gas at a $cin$ nct:at the welJ,.thenIn arrlving'at
$he:reyalty, td~be.p$d the State, a ??eaSonab;e,.?Wrge,m&y ..
be zkiesrkdfor the‘use:ofnecessaryplpelltied and protieas-.
Sag eqaipptent.. It.lrj 0W fapth+r..o~$ilon t&@t,t&..pre,
ti&ii-i~ Lease-B0.~‘3.‘clted ‘almwi ‘that 'tiequ%kW"the lesae$.
to lfemeve hydrooarbons; ii.~prefi6n~ In comnierclalq~~tltlea,
doed nst':change‘dr'affe,cti th& point at whiah the’btate’.d’
nryrilt$..lntereat 18 &xnp@ted,.and the lessee..&3&l$led :
te &%lqotpim~the &yalty p+d'the State's'pz%"tiata~~&&l;e~
oi.thq~,$@@.~se incarred:+.th~~ removal
.. ~il..suot!,,.hy~yocarbona..
Becauseof the wlde,poaalble varlatlona,'b~t~een"-'.
dlfferent‘si$mations reqtirlngthe les,g+to build trans-
poHlng and prodessleg&q~lpmetlt l~~marl&t%ig'gBb, we are
anaBlete.liiy down @yg‘eneral.-Puleti.for assessingsuch ..
ehatig+.againat th+.State;irndaaeh.)aharges In eaoh lndl-
~dria~,C~e.m~at~-be..dete~ned:.f~~.the,st~ndpolnt of
aoo&pte&aecouhtliig prl~ciples,.,t,o~'be properlydetermined
~'45~~ Sta$~'Audlkok
tinder .&l.le&& executedby the
Ge~tiralLaud Gffiae@der th6 authority'~
of.,Cwpter271, Aetts.42nd~izeg.,
1931;.
ihere'thevalue~oftialts'.gaaIs com-
puted cu the'basi8efyg p-i.&aSeprice. -
'. .,paldfor sriahgas.aiterlt.hasbeen trans-
A. portedglwn~thewell.site,the State53
lesseemay leg(rlly~.deduot
fron,theroyalty
paymentsfor'costbf~transpktatlanand
processingbetweenthe well head and the
purchasing'pointwhen these costs.are -
:"computed.aoetirdlng
to standardand accept-
able accountingprlriclples.
Yours very truly,
wII3, WILSON
Attorney Generalof Texas
RonorableJ. Earl Rudder,page 6 (WI?-196.)
APPRCvmx
OPINIOI?C~TEE
H. Grady Chandler,Chairman'. '.
Larry Jones
Joe Rollins
MiltonRichardson
paEi&ogOR THE ATT&m
:
Geo. P, BlackbUrn ..: